U.S. auto lenders top concerns heading into 2006

As 2005 comes to a close, outlooks for the coming year are beginning to trickle out. Although, as of last week, opinions remained limited participants seem to be learning and are predicting that issuance volume remain at least on par with 2005.

While mortgage-related ABS volume will be the deciding factor in whether next year tops the record 2005, there are a few more wild cards than there were at this time last year, when the market seemed bulletproof.

Uncertainty over the future of the U.S. auto manufacturers which arose this year, as well as consolidation in the credit card industry has made most 2005 predictions look foolish. Volumes for auto ABS topped the previous year's levels by more than 21%, thanks in part to finance units inability to access alternative liquidity sources for much of the year. And while consolidation in the credit card industry had been expected, it took increased issuance from previously less frequent issuers, such as Advanta Corp., to push 2005 levels only slightly past the previous year's volume.

Fitch Ratings Managing Director Mike Dean said during a conference call last week that his firm's predicted 15% volume growth "could be aggressive given consolidation trends and uncertain funding plans for some issuers," notably MBNA America Bank, which was acquired by Bank of America Corp. this year.

Nomura Securities, on the other hand, predicts credit card ABS volume will decline as the number of credit card issuers shrinks with each passing acquisition by financially stronger and more diversified financial institutions. "Because of their greater financial strength, today's issuers are less reliant on securitization as a funding source than were credit card ABS issuers of a few years ago.

For the first time, the prime auto sector is bifurcated, split between U.S. and foreign captive lenders. While spreads for non-U.S. lenders have pierced through their underlying benchmark rates, the U.S. lenders remain a major concern. As a result, 2006 auto ABS volume remains largely dependant on the health and well being of the U.S. captives.

As noted by Fitch analyst John Bella, prime collateral characteristics have shown "significant improvement" lately, the deteriorating strength of the domestic players - particularly General Motors Corp. - will have a major impact on the sector's future in the coming year.

Within the auto sector, Fitch has concern that the tight correlation between wholesale dealer floorplan ABS and the financial stability of the ultimate corporate parent may lead to early amortizations in the sector. Fitch has a negative outlook on the auto floorplan sector heading into 2006, Bella added.

The current pricing practices undertaken on behalf of auto manufacturers has negatively impacted used car prices, adding uncertainty to the auto lease and subprime auto sectors.

Student loans, which Fitch's Dean described as having a "hallmark year," should maintain the stellar collateral performance and strong issuance volume experienced throughout the year. Additionally, Dean expects an increase in private, non-insured, loan collateral to offset any declines in FFELP collateral, as loan consolidation declines.

Both Nomura and Fitch expect growth in off-the-run assets, particularly intellectual property. Insurance securitizations, film receivables and pharmaceutical patent-backed deals are expected to lead the way in this sector.